A consumer advocacy group in California has taken initial steps to place a proposal on the state's November 2014 ballot that would prohibit dealerships from adding to interest rates on consumer auto loans.

The Sacramento group, Consumers for Auto Reliability and Safety, characterizes the dealership add-ons, known as the dealer reserve, as "hidden extra charges."

Rosemary Shahan, president of the group, told Automotive News that like the Consumer Financial Protection Bureau, her group is OK with dealerships being compensated for arranging loans, but not if the dealership can add to the consumer's interest rate. "That's what we want to get away from," Shahan said in a phone interview last week.

The Consumer Financial Protection Bureau has said dealerships deserve to be compensated for negotiating auto loans but shouldn't have discretion in setting that compensation because minorities can end up paying higher amounts of interest than other borrowers. The bureau suggests lenders replace the dealer reserve with flat fees or some other form of dealer compensation.

The Consumers for Auto Reliability and Safety proposal calls for the state to "prohibit dealer markups." Other provisions would prevent dealers from hiring people with convictions for identity theft, forgery or fraud "for positions where they would have access to car buyers' personal financial information." The proposal also would prohibit what it calls "bait and switch financing, also known as yo-yo financing," in which a customer takes possession of a vehicle before the loan is approved then ends up agreeing to a higher interest rate when the loan falls through.

Brian Maas, president of the California New Car Dealers Association, told Automotive News that the proposal from Consumers for Auto Reliability and Safety is "a solution in search of a problem."

"No one, including the CFPB, has demonstrated any evidence that the things [Shahan] purports to fix, need fixing," Maas said. At $200, he said, it's easy and inexpensive to register a proposed ballot initiative in California. Actually getting it on the ballot, he added, is a lot harder and more expensive.

Shahan said her group would probably have to gather more than 800,000 signatures to get the 500,000 valid signatures needed to put the proposal on the ballot. She estimated the cost at $1.5 million.

Consumers for Auto Reliability and Safety has four versions of the proposal and hasn't decided yet which version it should canvass around the state, Shahan said. The "prohibit dealer markups" provision is included in two of the four versions. The group has until April 18 to collect enough signatures, she said.

Maas said even if the proposal's a long shot, it's no joke. "They have filed an official measure, and it has been cleared for signature gathering," he said. "We're taking it seriously."

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